Call: 866-494-6829

Taxpayers have the right to challenge the IRS’s position and be heard. This is one of ten of rights listed in the Taxpayer Bill of Rights, which clearly outlines the fundamental rights of every taxpayer.

While the IRS contemplates these rights are in place to assure a fairly administered tax system, in reality that is hardly the case as many people coming to me have expressed their unresolved tax problems and how the IRS has not helped them or is treating them unfairly not giving proper credence to their situation.

When Is The Best Time to Bring In A Board Certified Tax Attorney To Resolve Your Tax Problems?

First and foremost, you need atax lawyerif you have a dispute with theIRS or any State Tax Agency. Most tax disputes arise in the form of anauditof one or several past tax returns. If the IRS notifies you of an audit, you should hire a tax attorney immediately. Your tax lawyer can communicate with the IRS on your behalf, be present during your audit and help negotiate a settlement, if necessary. Having experienced legal counsel helps ensure that you don’t overpay as a result of your audit.

In some instances, taxpayers ignore letters and warnings from the IRS because they’re scared or don’t know how to respond. In those cases, the IRS may have no choice but to threaten you with criminal charges for tax evasion. If you learn that you’re the target of an IRS criminal investigation, you’ll want to hire a tax lawyer—and do it quickly.

Your tax lawyer can reassure the IRS that you’re taking its investigation seriously, work with the IRS in an effort to help you avoid criminal charges and represent you in court if you are charged with a tax crime.

Second, a tax lawyer’s help can also be invaluable if you’re facing a complicated legal tax situation. This might include instances where:

You’re starting a new company and are trying to decide between thevarious ways to structure your company

You’re theexecutor of an estateand need advice regarding whether and how much is owed in estate taxes

You receive a Collections Notice telling you that tax is due and/or threatening collection action

You want to sue the IRS

You think or know that you’ve committed tax fraud

Most people have tax problems because they did not plan how to do business, how to record transactions or how to account and substantiate their expenses or they have taken inappropriate or unjustified risky positions on their tax returns. Being proactive by engaging a tax lawyer to avoid having these problems in the first place would be wise to pursue. Additionally hiring tax counsel early on should assure that you do not blow any appeals or communicate something to the IRS that you later wished you never did.

Questions to Ask When Interviewing Tax Lawyer

At your initial meeting with a lawyer, you’ll want to share the specifics of your situation and then ask the lawyer about his or her experience handling similar matters. Know that lawyers are bound by strict confidentiality rules. Even if you end up hiring a different attorney, the lawyers you meet with cannot share the information they learned with the IRS or anyone else.

Do you just practice tax law, or do you also work in other areas of practice?

What are your credentials as a tax specialist (such as Board Certified Tax Law Designation, LL.M.(Tax) Degree or C.P.A. License)?

Have you previously handled tax situations similar to mine?

What’s your assessment of my situation? What works for me and against me?

If I hired you, what course of action would you recommend?

Do you charge a flat fee or hourly rate, or do you use some other billing structure?

Can you estimate my total legal fees?

What Should You Do?

If you have outstanding tax problems or liabilities with the IRS or any State Tax Agency, protect yourself and preserve your right to challenge the tax agency’s position and be heard. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Diego County (Carlsbad) and elsewhere in California are highly skilled in handling tax matters and can effectively represent you at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, unreported foreign income and unreported crypto-currency income.

What exactly are the pros and cons of leaving my 401(k) with my previous employer?

How accurate are the do-it-yourself type software that allow you to calculate and file your taxes after answering a few questions? Why is it more beneficial to have a tax professional prepare your taxes as oppose to said software?

Jeff states: Good afternoon! Yes sometimes we just have to take the money and run!

Welcome to Inside Advantage – Your Financial And Tax Radio Show.

This is Board Certified Tax Attorney, Jeffrey B. Kahn, the principal attorney of the Law Offices Of Jeffrey B. Kahn, P.C. and head of the KahnTaxLaw team.

Windus states:

And this is Licensed Financial Planner, Windus A. Fernandez Brinkkord, Senior Vice President Of Investments at Trilogy Financial Services.

You are listening to our weekly radio show where we talk everything about finances and taxes from the ESPN 1700 AM Studio in San Diego, California.

Jeff states:

When it comes to knowing tax laws and paying taxes, let’s face it — everyone in the U.S. is either in tax trouble, on their way to tax trouble, or trying to avoid tax trouble!

Windus states:

And whether you are on the rebound or flying high, we have the information you need to make sound financial decisions and map out your strategy for success.

Jeff states:

Our show is broadcasted each Friday at 2:00PM Pacific Time and replays are available on demand by logging into the KahnTaxLaw website at www.kahntaxlaw.com.

Jeff states:

For today’s show we have coming up:

Segment 2 material: 401(k) Plans

Windus states:

Also coming up is:

Segment 3 material: IRS Tax Audits and What You Should Be Aware Of

And of course towards the end of our show, we will be answering some of your questions.

Jeff starts chit chat with Windus.

Jeff states: So for today’s special guest:

We would like to introduce Chuck Hunter! Chuck is the Founder and CEO of Multivariable Solutions, a domestic and international Business Consulting Firm located here in the Greater San Diego area.

So Chuck, tell us a little bit about what you do?

What is your goal or mission at Multivariable Solutions?

What prompted you to found your own company?

What would you say your niche market is? What types of companies tend to come to you the most, whether it’s based on size, growth goals, or various sectors…

How long have you been with Multivariable Solutions? What had you done in your career before that prepared you to take on the role of CEO?

Most companies and consultants focus on one or two variables whereas Multivariable Solutions looks across a wide spectrum. What exactly do you look for?

Jeff states: Well it’s time for a break but stay tuned because we are going to tell you all about 401(k) Plans.

Welcome back. This is Inside Advantage – Your Financial And Tax Radio Show on ESPN and you are listening to Board Certified Tax Attorney, Jeffrey B. Kahn, and Licensed Financial Planner, Windus A. Fernandez Brinkkord.

And be aware of the special offer that Windus has for you: Windus PLUG: Trilogy Financial Services will provide you with a retirement cash flow analysis which is a $600.00 value for free as long as you mention the Inside Advantage Radio Show when you call to make an appointment. Call my office to make an appointment to meet with me, Windus A. Fernandez Brinkkord. The number to call is 858.314.5169. That is 858.314.5169. Or visit www.guideyourstory.com. NPC DOES NOT PROVIDE TAX NOR LEGAL ADVICE.

401(k) Plans

Some states, including California, are implementing regulation requiring companies of 5 or more people to offer retirement plans. In California, this is called the Retirement Savings Trust Act. The reason this is being required is:

The California State Treasurer states that based on their research fewer than 45% of California’s private workforce has access to a work sponsored retirement plan in the age group of 25-64. This is worse than the nationwide average of 53%. This is specifically only in the public sector.

To go a step further, in the public and private sectors, nearly ½ of all Californian’s are currently on track to retire with income below 200% of the federal poverty level of $22,000 per year for one person. *This information is coming from Trinet, an HR retirement planning company’s site. Trinet is one of many companies that help work on this here in San Diego.

The Secure Choice Retirement Savings is where companies that do not set up a plan of their own, will have to direct employees. The scary part of this is that for the first three years contributions could be kept in Treasury bills, regardless of your age, until more extensive models can be built! Better to have a large company like Fidelity or T. Rowe Price manage this then to have the treasurer put together a board that is going to take 3 years to put proper investment models in place.

*Chuck, with the work that you do, do you recommend companies start plans for their employees? When you do, what type of plans do you typically recommend?

There is also a new emerging “robo” 401k platform employers can implement. I have to say, when reading about this, a 401k plan is not the place for “robo” implementation. I can tell you that the IRS could have a field day auditing plans that are incorrectly established and 401k plans need to be very specific to the company.

Here are some main points for plans to remember:
*Employees with plan balances of under $5,000 can be forced out of the plan
*The fund line up should be reviewed on a schedule and there should be defined parameters for which funds are brought into the plan and removed from the plan.
*401k plans are required to have a diverse line up for employees to select from.
*Target date funds are becoming more popular and are often now the QDIA
*QDIA is the Qualified Default Investment for when an employee is auto enrolled in the plan but does not go in after to elect an allocation.
*Why might an employer elect to do auto enrollment?…because they want to contribute themselves without actually matching! J

Why a 401k plan over a SIMPLE plan.
*401k plans allow for employers to be selective about who is in the plan and match in a more creative fashion. Sometimes in a benefit to the employee and sometimes not. SIMPLE plans are “simpler” to maintain annually BUT they aren’t always on the best platforms for the employee and some have fees that just aren’t that transparent or favorable. The 401k plan can be a very powerful tool and if put in place correctly, can be very inexpensive to the employee for long term retirement savings. And in case anyone out there receives a 403 b 2 notice, THIS IS a key notice regarding the fees you pay in the 401k plan.

Top Company 401k plan issues:

Not removing or encouraging x-employees to rollover their funds
2. Too much company stock or TOO much risk options without enough conservative options for employees.
3. Not remitting money in a timely fashion
4. Being “top heavy” having to force money out of the plan for your top employees. Being Top heavy means earning more than $120,000 in income or being more than a 5% owner in the company.

Windus PLUG: Trilogy Financial Services will provide you with a retirement cash flow analysis which is a $600.00 value for free as long as you mention the Inside Advantage Radio Show when you call to make an appointment. Call my office to make an appointment to meet with me, Windus A. Fernandez Brinkkord. The number to call is 858.314.5169. That is 858.314.5169. Or visit www.guideyourstory.com. NPC DOES NOT PROVIDE TAX NOR LEGAL ADVICE.

Stay tuned because after the break we are going to tell you IRS Tax Auditing and What You Should Be Aware Of.

And be aware of the special Offer that I have for you: PLUG: The Law Offices Of Jeffrey B. Kahn, P.C. will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the Inside Advantage Radio Show when you call to make an appointment. Call my office to make an appointment to meet with me, Jeffrey Kahn, right here in San Diego or at one of my other offices close to you. The number to call is 866.494.6829. That is 866.494.6829.

Jeff states: So I don’t know of anyone who enjoys being audited by the IRS. The IRS randomly selects tax returns for audit each year.

Jeff asks: Amy can you go over the deadlines that the IRS has if looking to audit a tax return?

Amy replies: Now the IRS does have a deadline by which they must complete an audit of your tax return. Normally that deadline is three years after the due date of the tax return. So a 2013 income tax return that was filed by the April 15, 2014 filing deadline, the IRS would have until April 15, 2017 to audit that tax return.

Jeff states: Well here we are August 12, 2016 but do not relax so quickly. If you filed an extension for your 2013 tax income return, then you just extended the IRS’ time to audit to October 15, 2017.

Windus asks: Could the government have an even longer time to audit a tax return?

Amy replies: The government has an even longer time of six years where you omitted more than 20% of your income on your tax return and if you never filed a tax return or you filed a fraudulent tax return, there is no deadline for the government and you can be audited any time!

Windus asks: Amy, what are the different types of audits that the IRS conducts?

[Amy responds allowing Jeff to comment before proceeding to the next.]

Correspondence Audit: This is the least severe type of audit. It involves the IRS sending a letter in the mail requesting more information about part of a tax return. For instance, the agency may have questions regarding charitable deductions and request you send in receipts to substantiate your deduction. “It’s the lowest level of the audits.” “If you have the receipts or information it’s generally not an issue.” If your tax return is legitimate and you have the data to back up any claims on your return, you may want to handle the situation on your own. BUT If you don’t have the receipts or information, then you should have a tax representation professional deal with the IRS because you could face fines, penalties and interest if you end up owing money.

Office Audit: If the IRS has more questions about your return, then you’ll get a letter in the mail inviting you into an IRS office for the audit. The office audit is more serious, so you should always have a tax representation professional to come with you or turn over the audit representation to him. A tax representation professional can gather information in advance of the meeting and make sure it is complete so that the office audit can be wrapped up with the IRS as quickly as possible. “If the IRS still needs additional records, you’ll have time to supply the missing information.”

Field Audit: This is the most serious type of audit and involves the IRS visiting you at your home or office. “The reason the field audit is more serious is the IRS auditor will ask to see other things.” “They don’t want to limit it to particular items.” While there are much fewer field audits than office or correspondence audits, I wouldn’t let any client go into a field audit without representation. “It’s the most serious level of audit. If they are coming out to you, they are looking for something.”

Jeff states: So everyone wants to know, what sets off alarms at the IRS? Well for one thing it pays to keep in mind these 10 “red flags” that could increase the chance you’ll be targeted for an audit.

[Windus to read off each flag followed by Amy explanation and Jeff comment.]

High income. The audit rate for 2011 tax returns, which was about 1.11% overall, shot to 3.93% for taxpayers with income of $200,000 or more. That’s almost one out of every 25 returns. The IRS tends to chase the “big money,” and while that’s no reason to earn less, you should realize that higher income exposes you to a greater audit risk.

Unreported income. The IRS computers match up the income listed on W-2 and 1099 forms with the income reported on individual returns. You’re likely to draw IRS scrutiny if you don’t report all of your taxable income or if you underreport the total, even if an omission is inadvertent. Check your tax forms to ensure the information is correct.

Large charitable gifts. Besides providing personal satisfaction, deductions for charitable gifts can offset highly taxed income on your return. But the IRS may become suspicious if the amount you deduct is disproportionate to your income. In particular, make sure that deductions for gifts of property are legitimate and include an independent appraisal when required.

Home office deductions. If you qualify, you can write off your direct costs of using part of your home as an office, plus a percentage of everyday living expenses such as property taxes, mortgage interest, utilities, phone bills, insurance, etc. But the basic rule is that you must use the office “regularly and exclusively” as your principal place of business. Simply doing work at home when your main office is elsewhere won’t cut it.

Rental real estate losses. Generally, “passive activity” rules prevent investors from deducting losses on rental real estate. But a special exception allows a loss deduction of up to $25,000 for “active participants,” subject to a phase-out between $100,000 and $150,000 of adjusted gross income (AGI). Another exception applies to qualified real estate professionals. The IRS may zero in on taxpayers claiming losses under either exception. This aspect of the tax law can get very technical so you should inquire with a tax professional to see if you qualify.

Travel and entertainment expenses. This is often a key audit target. IRS agents particularly look for self-employed individuals and other business owners who claim unusually large write-offs for travel and entertainment expenses and meals. Note that the tax law includes strict substantiation rules that must be followed in order to deduct any of these expenses.

Business use of cars. Another area ripe for abuse by taxpayers is the use of a vehicle for business purposes. The annual amount you can claim via depreciationdeductions for the vehicle, based on percentage of business use, is limited by so-called “luxury car” rules. IRS agents have been trained to ferret out taxpayer records that don’t measure up. Another red flag is a claim for 100% business use of a vehicle, especially if another vehicle isn’t available for personal use.

Hobby losses. As a general rule, you can deduct expenses for a hobby only up to the amount of the income it produces. You normally can’t claim a loss for the activity, unless your involvement rises to a level of a bona fide business. Usually, an activity is presumed not to be a hobby if you show a profit in any three out of the past five years, but the IRS can refute this presumption.

Foreign bank accounts. The IRS has started clamping down on taxpayers with offshore accounts in “tax havens” in which banks do not disclose account information. Failure to report foreign income can trigger steep penalties and interest. If you have foreign bank accounts, make sure you properly report the income when you file your return.

Cash businesses. If you operate a small business in which you’re largely paid in cash—for example, if you own a car wash, restaurant or bar, or a hair or nail salon—the IRS is more likely to examine your return. Past history indicates that cash-heavy taxpayers may underreport their income or, in some cases, not report any income at all. Accordingly, the IRS remains on high alert.

Jeff states: These red flags don’t mean you should shy away from claiming the tax breaks you rightly deserve. But when the IRS knocks on your door you need to be prepared. Which is why …

PLUG: The Law Offices Of Jeffrey B. Kahn, P.C. will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the Inside Advantage Radio Show when you call to make an appointment. Call my office to make an appointment to meet with me, Jeffrey Kahn, right here in San Diego or at one of my other offices close to you. The number to call is 866.494.6829. That is 866.494.6829.

Thanks Amy for calling into the show. Amy says Thanks for having me.

Stay tuned as we will be taking some of your questions. You are listening to Board Certified Tax Attorney, Jeffrey B. Kahn, and Licensed Financial Planner, Windus A. Fernandez Brinkkord on Inside Advantage on ESPN.

And Windus and I always pleased to make our offers to our listeners where… PLUG: The Law Offices Of Jeffrey B. Kahn, P.C. will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the Inside Advantage Radio Show when you call to make an appointment. Call my office to make an appointment to meet with me, Jeffrey Kahn, right here in San Diego or at one of my other offices close to you. The number to call is 866.494.6829. That is 866.494.6829.

Windus states: Windus PLUG: Trilogy Financial Services will provide you with a retirement cash flow analysis which is a $600.00 value for free as long as you mention the Inside Advantage Radio Show when you call to make an appointment. Call my office to make an appointment to meet with me, Windus A. Fernandez Brinkkord. The number to call is 858.314.5169. That is 858.314.5169. Or visit www.guideyourstory.com. NPC DOES NOT PROVIDE TAX NOR LEGAL ADVICE.

You should also know that the securities and advisory services are offered through National Planning Corporation (NPC) Member FINRA, SIPC, and a Registered Investment Advisor. Trilogy Financial Services and NPC are separate and unrelated Entities.

Jeff states: And again I would like to thank our special guest, Chuck Hunter, CEO at Multivariable Solutions for being on the show today. Chuck as our special guest you have the honors of drawing the questions from our listeners for us to answer. OK Chuck, what questions have you pulled for us to answer?

Question: What exactly are the pros and cons of leaving my 401(k) with my previous employer?

Windus answers.

Question: How accurate are the do-it-yourself type software that allow you to calculate and file your taxes after answering a few questions? Why is it more beneficial to have a tax professional prepare your taxes as oppose to said software?

With the announcement released just recently that the IRS is hiring hundreds of new agents dedicated to doing tax audits, this means that it will be crucial for US taxpayers to stand up and take notice. In addition, with these new hires, the reports indicate that the agents are going to be more focused, on self-employed small-business owners, and those who are behind on filing their taxes too. For that reason, taking the time now to work with a tax advisor, or tax attorney service provider, could help the person to avoid issues when these workers start to do their jobs. With that said, for those that may find themselves facing this particular situation, this article will provide some suggestions they can put into practice immediately, so continue reading to learn more.

In past years, the IRS had become relaxed in regard to enforcing taxpayers who were delinquent on paying back the taxes they owed. Moreover, due to not having enough employees to cover the arrears log of audits, it was extremely difficult for them to enforce more audits, and focus their attention on the lost revenue from these backlogs of audits. Nevertheless, the Commissioner stated that with these new 700 hired employees, it was going to allow them to try, and recoup all those past years of revenue, which is owed to the government entity.

In addition, these brand-new hires are being made possible due to funds inside of the IRS becoming available for use, by the latest retirements taking hold. Keeping that in mind, many people think the extra $290 million, which Congress gave the IRS helped too with these recent auditor employees. In contrast, that is not the case, as those funds given were actually earmarked to be used for customer services, improvements to our cyber security, and the agencies long fight against identity theft.

With that said, the Congress said that they found these extra funds during their own internal review of their accounts, and discovered that there was enough within their current fiscal year, to provide for these new 600-700 enforcement positions. Moreover, they are not going to roll out the first set of job openings, at least for a few more weeks. However, when they do, they are placing them into the departments that oversee the self-employed taxpayers, and small-business owners. In addition, the IRS plans to place hundreds of more employees into other higher-level enforcement positions, later this year too.

Therefore, for those business owners who have just barely been getting by on covering their tax bills, they might be one of the first among the list to face audits, when these jobs get filled. Moreover, small-business owners might not be aware that some of the tax breaks they have been taking on their returns filed, might already be putting them at risk for a red flag to the IRS to look into those credits deeper. Keep in mind, that in the past, the IRS simply did not have the man power to enforce some of the discrepancies that business owners were taking on their filings.

In addition, for those that are self-employed, and who perhaps tried to save some cash, by filing out their own tax returns, they too should take notice on these new IRS agents. Keep in mind that the whole idea behind hiring these agents, is to allow the IRS to get more work completed faster for the general public. Therefore, if the business owner has fallen behind on taking care of their quarterly payments, and the enforcement agent comes across this information within their database as missing, these new hires are actually there to bring more enforcement to collecting those payments.

For that reason, taking the time to sit down with a tax attorney service provider could prove to be beneficial in certain circumstances. In addition, these professionals are very familiar with the most-recent tax laws, and ways to protect their clients from perhaps facing jail time for the amount owed to the government. However, if the small-business owner waits until they are contacted by these newly hired IRS enforcement agents, it might hinder how much the tax attorney could help their clients then. Therefore, spending a bit of time with the advisor now, to help the business owner take a closer look at their financial records, may even help them to reduce their overall tax bill long term.

Having said that, while many of the newly hired IRS agents will be placed into the self-employment, and small business departments, that is not to say that individual taxpayers are exempt from these audits either. In fact, the enforcement agents are going to be handling those taxpayers, who are already delinquent in their tax obligations with great force. Therefore, if up until now, the person has simply not been contacted by the IRS due to the lack of employees within those areas, they too should take notice of this article topic today. Be that as it may, taking the time to visit a tax professional advisor to look over the past five years’ worth of a person’s tax returns they have already filed with the IRS could also prove to be essential, if for no other reason than peace of mind.

When the IRS puts these newly hired enforcement agents to work within the next upcoming weeks, it could spell trouble for both small-business owners, and individual taxpayers alike. Moreover, this is especially going to be true, if these same self-employed businesses have fallen behind with their tax obligations, and have not been paying them on time for a few years or more. However, there are qualified tax attorneys that could readily guide their clients into getting caught up with their tax bills, before being audited by the IRS. Therefore, for those business owners, or individuals who find themselves in this particular situation, taking the time now to speak with a professional tax attorney could help bring the individual current with their tax obligations effortlessly.

Filing taxes is punishment enough without the vague threat of an IRS audit looming over our heads. For understandable reasons, the IRS insists on keeping the ins and outs of its auditing process on the murky side. How will you catch the bad guys if you give them the rule book first? But because of the sense of mystery around the process, it’s an area of regulation often misunderstood by taxpayers.

While it’s true that big businesses and the uber-rich are often targets of IRS tax probes, that doesn’t necessarily mean low- and middle-income workers are free and clear. The agency is increasingly relying on data mining and robo-audit systems to detect errors in tax returns, which has actually made it easier to go after small-fish taxpayers.

In 2013, the IRS audited more than 6.5 million taxpayers with an adjusted gross income of less than $1 million. And it audited fewer than 40,000 of those reporting $1 million or more.

One of the biggest reasons behind that discrepancy is the IRS’s move to pursue people who fraudulently claim the Earned IncomeTax Credit, a juicy tax break worth an average $5,891 for a family of five earning less than $50,270 a year. In 2012 alone, EITC fraud cost the government between $11.6 billion and $13.6 billion.

If you really look at the scrutiny of low- and middle-income wage earners, there is much more detailed scrutiny now than for those with investments and other sources of income. It just takes fewer resources to audit lower-income earners. And in all fairness to the IRS, Congress hasn’t been exactly generous with budgets.

And while the overall number of audits has been declining since 2010, the IRS has decreased the rate of millionaire probes more than other income brackets. Auditing rates for the under-$200,000 income club fell by only 0.14% between 2011 and 2013, compared with a 1.63% decrease in the rate of audits of those making $1 million or more, according to the IRS.

If the IRS’s computer system flags your tax return, you’d be hard-pressed to get an agent to pick up the phone, let alone make a house call. The traditional IRS audit and someone showing up on your doorstep is a thing of the past.

For starters, the IRS does not have the manpower. Thanks to rounds of budget cuts, the IRS has had to reduce staff by more than 8,000 employees since 2010 with no sign of relief yet. Congress recently ordered the agency to slash another $526 million from its budget in 2014.

And while the agency’s funding and employee count decrease, more and more Americans are filing taxes each year, nearly 146 million in 2013 alone, up from 138 million five years ago.

Of the 6.5 million audits conducted last year, only 362,500, or 5.5%, resulted in an actual field visit. If your return is flagged, you’ll most likely get a letter in the mail seeking additional information. From there, you can either answer by return mail or call them directly.

Myth #3: If I owe tax money, the IRS will be after me in a hurry

Rest assured, if IRS flags your return for suspicious activity, you will hear from them at some point — but probably not for a year or two…or more. The IRS actually has three to six years to go after questionable tax returns, and with personnel shortages, even taxpayers who willingly call them to sort out issues have a hard time getting them resolved.

Last year, more than 20 million phone calls to the IRS went unanswered, leaving just 61% of callers able to get through to a human being.

The IRS is under-funded and under-staffed. If a consumer calls the IRS, when they get through to a human being, they will likely just be told where to find the answer on the IRS website.

Myth #4: If I file for too many deductions and tax credits, I’m setting myself up for an audit

Tax credits and deductions are there for a reason: to ease the tax burden for workers who need it most. Don’t let the threat of an audit dissuade you from applying for tax credits and deductions you’re justifiably due.

Despite the IRS’s efforts to crack down on Earned IncomeTax Credit fraud, it is actually one of the most commonly overlooked deductions. Twenty percent of eligible workers have missed out on the EITC, which is worth an average $5,891 for a family of five and $475 for single-filers without children.

Home-office deductions are another oft-cited target for the IRS. But it’s an overblown fear that hardly applies today, when there are more than 42 million Americans working as freelancers and independent contractors.

This was once the case, back when working from home was less common but with millions of home offices running today, the system is far more accommodating for home office users. The important thing to remember: Make sure you keep your receipts and documents and only deduct legitimate business expenses… which mean that the expense must be typical and necessary for your business.

The bottom line: If you’ve earned a tax credit or can justifiably claim a deduction, do it. Just make sure you’ve done the research and know what you need to back up your claim first.

Myth #5: I’ve got my tax refund so I don’t have to worry about an audit.

Even if your tax return was accepted and you cashed your refund check, you’re still fair game for auditors.

The IRS uses a special matching system that tracks each taxpayer’s W-2s, 1099s and 1040 forms. If it turns out that you’ve under-reported your income, the system will eventually catch up to you.

You could get your refund, and about one or almost two years later, if there’s a problem with your taxes, you’ll likely get a letter in the mail from the IRS.

As noted above, the IRS has three years to track you down, but in extreme cases of underreporting or tax evasion, they can basically come after you whenever they want.

And that’s not even the worst part. Any interest and penalties owed on your unpaid taxes will start accruing the day your taxes were due — not two years later when the IRS letter finally shows up in your mailbox. Two years of compounding interest and penalty charges will only add salt to the wound.

Don’t Take The Chance And Lose Everything You Have Worked For.

Protect yourself. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Diego, San Francisco and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems to allow you to have a fresh start.

Carelessness on your tax return might get you whacked with a 20% penalty. But that’s nothing compared to the 75% civil penalty for willful tax fraud and possibly facing criminal charges of tax evasion that if convicted could land you in jail.

It’s one thing to make an innocent mistake on your taxes, or to overlook a tax break that could lower what you owe the IRS. While such innocent mistakes will still cost you, they usually won’t invoke the ire of the IRS to pursue criminal prosecution or assess a Civil Fraud Penalty.

When you intentionally disregard tax law, however, such willful neglect will get you in real trouble. The IRS defines “willfulness” as a voluntary, intentional violation of a known legal duty, specifically your tax filing and payment responsibilities.

Such intentional tax violations could lead to tough penalties on top of the unpaid tax and interest added to it. In some cases, the IRS pursues intentional violations as criminal acts that could carry jail time.

So it’s not a good idea to think even think about neglecting your tax filing duties or fudging the entries a little or a lot.

And in case you have any doubt as to what might be problematic, here are the top tax sins that could land you in very hot tax water.

Failure to report all the money you make is a main reason folks end up facing an IRS auditor. When it comes to earned income — that’s your pay for work performed — not reporting payment generally isn’t an issue if all your money comes from wage or salary income. That amount is detailed on W-2 forms that must be attached to your Form 1040.

But if you’re an independent contractor, either as your full-time job or from side work in addition to your salaried position, it’s your responsibility to keep track of your earnings and let the IRS know the amount at tax time. When you’re paid more than $600 you should get a 1099-MISC from the client. And when your business accepts credit cards for payment, remember that each year your credit card merchant service provider will issue a 1099-K reflecting all the charge sales your business made. Don’t think of ignoring one of these forms. The IRS gets copies, too.

And even when you don’t get an earnings statement, it’s still your legal duty to report the income. Even without third-party tracking, the IRS will take a long look at your return if the numbers seem off.

Unearned income generally is investment income. In these cases, your banker, broker or the mutual funds that you bought directly will send you 1099-DIV or 1099-INT statements with your annual earnings. Again, don’t think you can “forget” to count one or more of these amounts. The IRS is copied on these statements, too.

3. Forgetting about foreign funds

Foreign financial accounts add another layer of complexity and potential costs if you fail to report them. The IRS has been on a mission for the last few years to halt hidden offshore accounts, significantly increasing its detection efforts and prosecuting owners of unreported accounts. And now starting with 2014 foreign banks are reporting interest and investment income to the IRS just like their domestic bank counterparts

The risk is even greater if you own a foreign financial account that must be disclosed under the Foreign Bank Account Report (FBAR) rules or the Foreign Account Tax Compliance Act (FATCA). A whole separate set of penalties applies here with a minimum amount of $10,000.00 per year per each account not disclosed.

Tax deductions are a great way to reduce your tax bill. They lower your income, which generally means your tax liability will be lower, too. Many taxpayers, however, are tempted to inflate the amounts that they claim on Schedule A.

The IRS, thanks to its automatic computer screening tool known as the discriminant information function (DIF), knows what the average deduction amount is for various income levels. If your claims are larger, you can bet your 1040 will be pulled for further review.

If you did indeed have an unusually large but legitimate charitable deductions, great. Claim those that you have receipts for and then show the IRS examiner your substantiating documentation. But if you’re just pumping up the amount on your own, you could face serious consequences.

As you can see, there are lots of tempting opportunities to hike amounts to reduce taxable self-employment income. Were those stamps really for office mailings, or did you use them to send out personal holiday cards? What about that book? Was it really something that helps your run your company better or was it a volume you wanted for your personal bookshelf?

A specific section of Schedule C that’s prone to, shall we say, shady claims is the meals and entertainment line item. When properly claimed, a business owner can deduct some of the costs of taking a client out to eat and/or an entertainment venue. But sometimes business folk go out with friends and then write it off as a business expense.

That’s not to say that you can’t be friends with other business owners or even your clients. But when you’re picking up the check, you need to make sure that the dining etc. experience is really work related. You can’t just go out with a friend, ask “how’s your business going?” and then claim the evening as a business expense. Well, you can, but if the IRS catches on to your expense ruse, you’re in trouble.

This also could be a tax problem if you combine business and personal travel. While that’s totally acceptable to the IRS, you can’t claim the travel costs as a business expense if you actually spent more time lounging on the beach instead of meeting with new clients for your new line of bathing suits.

Instead, make sure you know how to make the most of legitimate business entertainment expenses and travel expenses by hooking up with a tax professional.

7. Sharing your home office

A home office isn’t an automatic red flag but that doesn’t mean you should be cavalier in claiming your work space. If the room or specific area in a room isn’t used regularly and exclusively for your business dealings, it does not qualify as a home office.

Yes, it’s easy to ignore those personal files in your desk drawer. Afterall, when you worked at a cubical for your employer you had personal stuff there. But technically, you are illegally claiming this deduction if you conduct personal tasks in your so-called office.

8. Using whole, rounded numbers

Yes, round numbers are easier to add and subtract. Yes, your tax software rounds entries. And yes, even the IRS says you can round your entries on your 1040 to whole dollars.

But when it comes to deductions and expenses, it tends to make the IRS think that you are making up amounts. Now some people add tip amounts so that meal checks come out to even numbers. But those people should still keep those receipts. Other financial transactions, however, rarely end in .00. And since when to all your business expense you are claiming on your tax return end in round hundreds or thousands? At best, all those rounded numbers make it look like you didn’t keep good records showing precise amounts. And that could encourage the IRS to take a closer look at all your entries.

Sometimes determining just who is your tax dependent can be messy. There are lots of rules about relationships and support earned or provided and who lives for how long in your house. You also must have the Social Security number of the person regardless of relationship that gets put on the 1040.

Sometimes the confusion leads to an innocent mistake as to who is eligible to be listed as your tax dependent. Other times, though, folks knowing claim a person as dependent to get the added exemption amount or to claim the refundable Earned IncomeTax Credit.

Faking dependents is not a good idea. The IRS knows this happens. It looks at who has and hasn’t been named before on your return. Plus, family situations often are messy enough without adding tax cheating to the mix.

10. Not making a profit

Legitimate business owners want to make money, even if it means paying taxes. Other folks, though, set up operations that they fully intend to run at a loss for tax purposes. That is the textbook definition of a tax evasion scheme.

The IRS is wise to this and tries to limit such losses by requiring that a business eventually make a profit. According to the IRS time table, eventually means you must be in the black in three out of five years.

Your inability to do so will cost you. And if the IRS can show your bleeding bottom line wasn’t just due to a lack of business aptitude, but a willful intent to operate at a loss, you will be deemed to have committed a tax sin.

Remember, carelessness on your tax return might get you whacked with a 20% penalty. But that’s nothing compared to the 75% civil penalty for willful tax fraud and possibly facing criminal charges of tax evasion that if convicted could land you in jail.

Don’t Take The Chance And Lose Everything You Have Worked For.

Protect yourself. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Diego, San Francisco and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems to allow you to have a fresh start.

If you are earning income through entities like Uber, Lyft, Airbnb and others, beware the IRS will be verifying your reported income.

The Sharing Economy

On the internet, everything is for hire. Last night 40,000 people rented accommodation from a service that offers 250,000 rooms in 30,000 cities in 192 countries. They chose their rooms and paid for everything online. But their beds were provided by private individuals, rather than a hotel chain. Hosts and guests were matched up by Airbnb, a firm based in San Francisco. Since its launch in 2008 more than 4,000,000 people have used it—2,500,000 of them in 2012 alone. It is the most prominent example of a huge new “sharing economy”, in which people rent beds, cars, boats and other assets directly from each other, coordinated via the internet.

You might think this is no different from running a bed-and-breakfast, owning a timeshare or participating in a car pool. But technology has reduced transaction costs, making sharing assets cheaper and easier than ever—and therefore possible on a much larger scale. The big change is the availability of more data about people and things, which allows physical assets to be disaggregated and consumed as services. Before the internet, renting a surfboard, a power tool or a parking space from someone else was feasible, but was usually more trouble than it was worth. Now websites such as Airbnb, RelayRides and SnapGoods match up owners and renters; smartphones with GPS let people see where the nearest rentable car is parked; social networks provide a way to check up on people and build trust; and online payment systems handle the billing. I call these websites “sharing economy facilitators”.
As the sharing economy continues to grow, so do the associated tax problems. The IRS obviously is interested in folks who earn money using their autos as on-call car services or rent their homes to out-of-towners.

Duty To Report Income

Except as otherwise in the Internal Revenue Code, gross income means all income from whatever source derived (IRC Sec. 61). So whether your work in the sharing economy is you only job or a secondary job, you need to report your income from that work on your income tax return.
Remember you are not an “employee” of the sharing economy facilitators; you are an “independent contractor”. As such, there is no withholding of any taxes from your checks; you are responsible for all taxes – Self Employment taxes and income taxes – on your net earnings. Uber spells this out, sort of, on their site:

“You pay taxes as an individual—there’s no need to register as a business. File taxes as you normally would, and we’ll send you a 1099 form that you will use to report the income you made driving with Uber.”

You will report your net income from your Uber activitiy, (i.e., what you are paid minus any associated expenses), on Schedule C and the Schedule C “bottom line” will show up on line 12 of your Form 1040. (“Business income or (loss). Attach Schedule C or C-EZ”.)

The net income from your activity with the sharing economy facilitator is subject to Self Employment taxes, (Social Security and Medicare), at a 15.3% rate. Now you will get to deduct one-half of these Self Employment taxes on your Form 1040 but if you consider that you still have income taxes to pay as well, the effective tax rate can easily exceed 30% and you will also have your state’s income tax on top of that.

So whether you are using your personal car for business or part of your residence as a “B&B”, you will need to have good personal records of your expenses. In a situation where you are using your personal car for business you typically can deduct either “actual” costs for the percentage of business use, (though cell phone and food probably are not pertinent) or you can deduct mileage at a standard rate for business use. If you go the “simple” route and deduct mileage instead of “actual” expenses your Schedule C would consist of exactly 2 lines so it’s not very hard – but you will loose out on a lot of deductions.

Why The IRS Likes The Sharing Economy

Unlike traditional transactions where two parties directly deal with each other and nothing is reported to the IRS, sharing economy facilitators who connect the two parties, collect the money from the paying party and transmit the revenue to the service provider will report the sale to IRS using Form 1099. The IRS now has a tool by which they can match up the amount of income you report on your tax return and if the Form 1099 amount is greater, you can be sure that the IRS will catch this and send you a tax bill.

How About Money Collected For Special Projects?

Money collected for special projects via crowd-sourcing sites also is generally viewed by Uncle Sam as taxable income, regardless of whether it’s for a movie or a recipe. There is no tax benefit even to contributions to help out folks in need.

No tax break for donors – Setting up online money-collection sites like GoFundMe to help out folks who’ve encountered a catastrophe is today’s equivalent to the donation jar at the neighborhood grocery. Just that those dollars, since the crowd funding money is given directly to the individuals, not to IRS-approved 501(c)(3) organizations that pass it along, tax laws regarding charitable gifts say that the donors can’t deduct the gifts as itemized tax deductions.

Income to recipients – Now you would think that the money the recipient of the crowd-sourcing account do not have any tax worried as the Internal Revenue Code says that gifts are not taxable income to the recipients. But IRS is treating these funds received as taxable income and after matching the recipient’s tax return to the Form 1099 reported by the company running the crowd-sourcing account the IRS will generate a tax bill where the reported income is understated. It does not matter that the money received was used for the purpose intended when setting up the account. So until the IRS issues any definitive guidance or a Court weighs in on this issue, beware.

Don’t Take The Chance And Lose Everything You Have Worked For.

Protect yourself. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Diego, San Francisco and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems to allow you to have a fresh start.

It’s that time of year again…tax season. For many small business owners, taxes top the list of business-related concerns. In fact, the National Federation Of Independent Business (“NFIB”) Small Business Economic Trends survey, released earlier this year, revealed that 20% of businesses cite taxes as their biggest problem.

With April 15th fast approaching, more and more small business owners are tossing around the idea of filing for a much-needed tax extension. While filing for an extension might seem like the way to go during the hustle and bustle of tax season, there are a few things small business owners should consider before deciding to file for a six-month extension:

Extra time to file doesn’t mean extra time to pay.

An extension will change the tax filing deadline from April 15 to October 15, but you still have to pay the tax you owe by the April 15th deadline.

If you don’t, you’ll have to pay interest on the unpaid amount plus an extra 0.5% in penalties for every month you’re late. However, the penalties for not filing on time are much higher than the penalties for not paying on time; 5% for each month or part of a month you’re late, up to 25%.

That being the case, if you need extra time to finish up your tax return, don’t hesitate to file for an extension. In an effort to avoid needing to file an extension, implement a payroll system you can rely on to automate tax filings and maintain compliance in accordance with ever-changing state and federal regulations.

You can’t be sure exactly how much you owe without first completing your tax return.

And, while filing for an extension gives you an additional six months to finish your tax return, you still have to pay the amount owed by April 15th; meaning you’ll have to do some heavy estimating.

If you miscalculate the amount of tax owed, you’ll have to pay the necessary penalties and fees. If you paid less than 90% of the tax you owed, you’ll end up owing a penalty of 0.5% of the unpaid amount every month until you pay the balance.

To avoid unnecessary penalties, the IRS has a Form 1040-ES that includes a worksheet you can use to calculate your estimated tax payments but given the complexities of the tax law and ever-changing rules, it is best to seek a professional tax advisor to ensure the accurate calculation of taxes owed.

It will make acquiring a new loan difficult.

If you think you might need a loan sometime in the near future, you might want to think twice before filing for an extension. For starters, a recently filed tax return is usually a required financial document when seeking a loan or other forms of credit from a bank.

Banks use recent tax returns to gauge compliance. While filing for a tax extension doesn’t necessarily raise any red flags, not having your tax return in hand does little for your cause.

As a small business or startup, you might be due a tax refund from the IRS; that is once you file your taxes. Filing for a tax extension also means having to wait awhile longer to claim your tax refund. If you wait to file your taxes until October, you won’t see that money until the fall.

Extending the filing of your tax return extends the period of time that the IRS can select your tax return for audit.

Generally the IRS has up to three years after the filing deadline of your tax return to select it for examination or audit. So if you timely file your 2014 tax return by April 15, 2015, the IRS will have until April 15, 2018 to audit your 2014 tax return. However, if you file an extension of your 2014 tax return, the IRS will now have until October 15, 2018 to audit your 2014 tax return.

Filing an extension where your prior years’ tax returns are currently under examination.

Since the IRS has a three-year window to audit tax returns, if your 2012 or 2013 tax returns are currently under examination, it is probably a good idea to file an extension for 2014. This way, the scope of the audit is not expanded to the 2014 tax year as you now would have until October 15, 2015 to file your 2014 tax return. The IRS cannot force you to file a tax return before its filing deadline so if your audit is completed before October 15th, you may delay or even avoid 2014 being examined by IRS.

Filing an extension where you are currently on a payment plan with the IRS.

A condition of any payment plan established with the IRS for your back tax liabilities is that you do not create any new liabilities. If you expect to owe for 2014 and you file your tax return no later April 15th with an unpaid balance, the IRS computers will automatically default your payment plan putting you back to square one. But if you file an extension for 2014, you could possible delay this action by IRS for at least another six months which may be enough time for you to put away extra funds so that when you file 2014 you can include full payment of the balance due and avoid default.

If seeking a payment plan or Offer In Compromise for your back taxes, don’t file an extension and file no later than April 15th.

Where you owe back taxes to the IRS, it’s usually a good idea to include all tax years in your proposal which could be a payment plan or Offer In Compromise. Only existing liabilities from filed tax returns may be wrapped into any proposal. A liability from a 2014 tax return that has yet to be filed will not be included in your proposal and when it now comes time to file, you will need to include full payment. Otherwise, you now defaulted what was previously set up.

And if you have foreign bank accounts ….

Filing for an extension on your income tax return does not extend the June 30th deadline to file your Report Of Foreign Bank Accounts (“FBAR”) using FinCEN Form 114 with the U.S. Department Of Treasury.

Don’t Take The Chance And Lose Everything You Have Worked For.

Protect yourself. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Diego San Francisco and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems to allow you to have a fresh start.

In separate reports, Zen99 and the consumer finance web site nerdwallet ranked Los Angeles the best city for freelancers. In 2012, 12% of people in Los Angeles reported themselves as self-employed. Each of these website reports considered housing and health care costs, the percentage of freelancers in an area as factors. Even before the sharing economy began to take off, the entertainment industry and growing tech scene were already strong sources of freelance gigs in L.A.

For freelancers, consultants, actors and other self employed people, life gets complicated come tax time. Digging around for the paperwork to fill out tax forms practically qualify as exercise. Such business people have a nightmare trying to find receipts which is why you should keep track expenses and receipts year round rather than pursuing a paper chase as April 15th nears.

Remember when you can’t find receipts, you can’t write off your expenses and therefore you are paying more money to the government instead of keeping it for yourself.

Here are seven don’t – or, deadly sins, for freelances at tax time:

Not knowing what they owe. There are 20 different 1099 forms that get sent out to workers to track freelance gigs. One of them is the 1099-K, which only has to be sent to you by a company in paper form if you make over $20,000. People think – Great, no paper form, no taxes on that. But that’s a big mistake – you still have to self-report the income.

Not knowing WHEN they owe. For freelancers who owe more than $1,000 in taxes for a year, tax time comes more often than just April 15th. They have to pay taxes quarterly. But then it’s not coming out of paychecks like it does for permanent employees.

Not tracking and writing off the right types of business expenses. Many freelancers fail to realize they can write off part of their cell phone bill as a business expense. Expenses vary by the type of work. A rideshare driver’s biggest expense will be related to their car, while a web developer’s biggest expense might be their home office. Figuring out what expenses are important to your type of work is important is maximizing your tax savings.

Writing off personal expenses. This goes back to that cell phone. If you use the same phone for personal and business purposes, don’t be tempted to write the whole bill off. Estimate the amount you use it for your work. The same goes for your vehicle. Don’t go trying to write off miles driven to the beach.

The Double No-No: counting expenses twice. Speaking of vehicles, most people use the Standard Mileage Rate ($0.56/mile for 2014), which factors in gas, repairs and maintenance and other costs like insurance and depreciation. But if you use this rate, you can’t also expense your gas receipts and repair bills.

Employee AND employer. Freelancers they play both roles. For regular employees, Federal, State, and payroll taxes are withheld from a paycheck, and distributed on the employee’s behalf. It’s how Social Security and Medicare are funded. The IRS mandates that the employer must pay half of every employee’s payroll tax, and the employee is responsible for the other half. Independent contractors have to handle both halves. The IRS does give you a small benefit by letting you deduct the half that you pay yourself as a business expense but don’t believe that because of this a freelancer pays less taxes than the regular wage-working employee.

Not keeping adequate records. The IRS requires you to keep proof of all business receipts, mileage, etc. If you can’t show these, the IRS could refute the expense and force you to pay back taxes. The good news is there are other ways to prove expenses if you’ve lost the receipt. A bank or credit card statement with the date and location might do the trick. The IRS may be accommodating if you are doing your best but if you’re being a headache, they’re going to be a headache as well.

What the tax man looks for.

It is a statistical fact: Self-employed individuals are much more likely to get audited than regular employees.

A tax auditor is looking for certain things when they audit you and your business. The IRS training manuals note that the auditors are examining you and not just your business tax return. Your lifestyle may be checked against your reported income to see if there is a discrepancy which shows skimming, diversion of funds or deception. For example, that mansion with the truck-mount van parked out front may send up the wrong “economic reality” flag.

Travel and entertainment deductions in a business are usually suspect as some people try to deduct personal entertainment and meal “business” expenses. You must be able to clearly explain the business relationship in a credible fashion. Taking your friends out to the ballpark or taking the family on a vacation to that industry conference may not quite pass the litmus test of an audit. Writing off your legitimate business entertainment expenses requires detailed explanation of the reason for the expense, as well as a receipt.

Your calendar will undoubtedly be scrutinized to make sure there are no glaring gaps between possible work, vehicle or equipment usage and the income reported. As an example: If you are claiming 100% business vehicle usage but your calendars do not confirm the times and locations of service stops, you may be open to an analysis of possible personal use of the vehicle. Entries in a business diary or calendar help to justify an expense to an auditor as long as it appears to be reasonable.

Businesscredit cards are also highly scrutinized as they have a high potential for misuse (such as use for a personal vacation or personal expenses). Keep these only for legitimate business expenditures (places where company checks won’t do). Too many times a small business owner says that they will “reimburse the business later” for that personal expense put on the business card. That routine just opens you up for closer inspection.

Don’t Take The Chance And Lose Everything You Have Worked For.

Protect yourself. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Diego San Francisco and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems to allow you to have a fresh start.

Under normal audit procedures, the IRS issues a 30-day letter, giving a taxpayer 30 days to file a protest and request an Appeals hearing. On the taxpayer’s failure to request a hearing or following an Appeals hearing, the Service issues a 90-day letter (officially called a “Notice Of Deficiency”), giving the taxpayer 90 days to file a Tax Court petition before collection proceedings begin.

With the reduction in the number of IRS audits and a reliance on computer matching, some taxpayers are facing automatic computer-generated 90-day letters, without first receiving a 30-day letter. IRS personnel call this practice, “smokeout” whereby the 90 days will toll around the time the IRS finally determines whether the tax is due, so that it can institute collection proceedings without delay.

While it is possible that writing letters and contacting the IRS could resolve disputes before the IRS issues a 90-day letter, you do not want to count on fully resolving the dispute within the 90-day period after the Notice Of Deficiency is issued. So in those cases, you will want to preserve your appeals rights by filing a petition in Tax Court.

Once a taxpayer files a Tax Court petition, IRS District Counsel has jurisdiction. Usually about six weeks after the Petition is filed, the IRS District Counsel will respond with a written Answer. Counsel then refers the case to the IRS Appeals Office to determine whether Appeals can settle it. If you are represented by counsel, Appeals and District Counsel will deal directly with your representative who must be admitted to practice in Tax Court.

Scam Artists Now Using The Tax Court Docket As A Means To Scam Taxpayers

For those taxpayers who are unrepresented by counsel and file a petition in the U.S. Tax Court, scam artists are now scouring the Tax Court docket (which is accessible by the public) to obtain information on taxpayers having disputes with the IRS and then calling the taxpayer before the taxpayer even receives the Answer that was filed by IRS District Counsel.

These callers may demand money or may say you have a refund due and try to trick you into sharing private information. These con artists can sound convincing when they call. Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves. They may know a lot about you and may be able to recite the last four digits of a victim’s Social Security Number and your place of business. They usually alter the caller ID to make it look like the IRS is calling – many times they will use a Washington, D.C. area code. The area codes for the Washington D.C. area are 202, 301 and 703. They will also background noise of other calls being conducted to mimic a call site. If you don’t answer, they often leave an “urgent” callback request and if they have your email address, will send bogus IRS emails to some victims to support their bogus calls. After threatening victims with jail time or driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.

Threaten to bring in local police or other law-enforcement groups to have you arrested for not paying.

So What Should You Do?

If you get a phone call from someone claiming to be from the IRS and asking for money, here’s what you should do:

If you know you don’t owe taxes or have no reason to believe that you do, report the incident to the Treasury Inspector General for Tax Administration at 1.800.366.4484.

And if you do owe taxes and you have not already resolved this with the IRS, then that is where we come in. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Diego, San Francisco and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems to allow you to have a fresh start.

Your hobby business could land you in Tax Court – avoid IRS pitfalls by how you structure your small business.

Many people successfully develop a hobby into a going concern and actually receive income from it. That income must always be reported and taxes paid on that money regardless of your situation. If you leave that hobby as a hobby, under the tax law, you are not allowed to deduct any of the losses incurred by activity in that hobby. That is the reason most people turn their hobbies into businesses once they start making money.

When Are Hobby Losses Deductible?

By showing that your pursuit of your “hobby” is an activity engaged in for profit, you may be able to deduct those years where you incurred losses if you meet certain presumptions.

For activities not involving the breeding, training, showing, or racing of horses, the presumption is that you business is an activity engaged in for profit where you show annual net income from an activity for 3 or more of the taxable years in the period of 5 consecutive taxable years which ends with the most recent taxable year. So if for the first three years your activity has incurred losses, you must show net income in years four and five (even if only $1.00 in each year) in order to still be able to deduct the first three years of losses.

For activities involving the breeding, training, showing, or racing of horses, the presumption will work in the same fashion except you must show annual net income from an activity for 2 or more of the taxable years in the period of 7 consecutive taxable years which ends with the most recent taxable year.

Challenges In U.S. Tax Court.

Despite these presumptions, the IRS does not always see your hobby as a viable business, and that is where tax difficulties arise. There are a number of court cases where the question of hobby or business has been decided for the particular business by the IRS, and under challenge, the cases end up in Tax Court. Here are five cases that landed in Tax Court worth discussing.

1. Fishing: In Busbee v. Commissioner, T.C. Memo 2000-182, this taxpayer decided to hold fishing tournaments. These tournaments required him to promote the activity through flyers, speaking engagements, and other marketing efforts. He had to recruit participants and sponsors. He intended his hobby of fishing tournaments to supplement his retirement income as he developed it into a business. Through the process, he became an expert in bass fishing. The Tax Court considered all of this, and allowed his business.

In Peacock v. Commissioner, T.C. Memo 2002-122, this taxpayer began tournament fishing in his retirement. Sailing everywhere on his personal yacht, he and his wife fished specifically for the pleasure of participating in the tournament, especially when these tournaments were in exotic locales. In this case, the Tax Court decided this was not a business but a hobby for the activity was not “motivated primarily by the pursuit of profit”. What probably hurt their case, even subtly, was the fact that they had just sold a business and were now millionaires.

2. Golfing: In William James Courville v. Commissioner, T.C. Memo 1996-134, an optical engineer, after 30 years of employment, was laid off. He decided to become a professional golfer, but took only 4 golf lessons while a “professional”. He did not qualify for the senior tour, and ended up with no income from this activity. However, he did submit a Schedule C, listing expenses totaling over $16,000. The Tax Court declared that he “failed to establish that his golfing activity was carried on with the actual and honest objective of making a profit”.

3. Track and field coaching: In Parks v. Commissioner, T.C. Memo 2012-105, the taxpayer began his professional career as a writer of freelance articles on the sport of track and field. Over a number of years, he owned a track and field magazine, coached at a number of different locations, studied with one of the foremost experts in the industry, then basically tried to establish himself and his trainees as credible within the field. By 2006, this man had a winning contestant who qualified for the Olympic trials, and by 2009, that contestant signed the taxpayer coach to a lucrative contract as his exclusive coach, and things only got better for the taxpayer. However, in a tax period of 9 years, the coach showed only a $43 profit, so the IRS claimed hobby not business. The Tax Court considered the case in great detail and decided primarily (although not all points) for the taxpayer, saying his income was growing and he had great potential for success. They did not see track and field as a typical hobby, and that did work to the taxpayer’s benefit.

4. Writing: There is an infamous case which always gives people a chuckle, and that is the man who decided to write about prostitution. Vitale v. Commissioner, T.C. Memo 1999-131. Ralph Louis Vitale, Jr., in 1999, claimed on his tax return that he was in the business of writing about prostitution. When this taxpayer began his “research” four years before his retirement, he was still a full-time employee. Over the course of time, he visited a large number of brothels doing his “research” and always paying for services in cash (no records kept). He did keep a journal detailing each of his visits and expenses, and eventually developed a manuscript from his notes. Vitale submitted his manuscript to a vanity publisher, paying $4,375 to publish it. All tolled, after he received $2,600 in royalties, the publisher went bankrupt. Subsequently, the book rights were returned to him, and he again began marketing his book throughout the industry. The IRS said this was just a hobby and disallowed Vitale’s deductions. So Vitale went to Tax Court. At first, the Tax Court felt that the taxpayer had a profit motive and overruled the IRS, even though the court also made comments about the “recreational” qualities of the contents of his book. The court did like his record-keeping and marketing and felt it showed his professionalism. But then the Tax Court disallowed all of his deductions, for the taxpayer could prove none of them (remember the cash payments?). Nevertheless, the court did not penalize this taxpayer in any way, saying that he had made a reasonable attempt to comply with the law.

The U.S. Tax Court weighs “profit motive” most heavily in each of their decisions. Profit is a key decider when considering whether an activity is hobby or business. Is your hobby truly for profit or only for pleasure? That is foremost and basic premise that the Tax Court considers.

What Should You Do?

There seem to be two “hobbies” that trigger audits most frequently and those are horses or yachts. Both are money pits, and so if people can figure out a way to make a business out of them, that will provide either tax deductions and/or income to cover the high expenses of each. The IRS knows this, and is very strict when applying the rules to these activities. When structuring these, pay very close attention to business start-up details.

Regardless, if you follow good business practices when converting your hobby into a business, you have a greater chance of convincing the IRS it is a real business. Your business records must be up-to-date and accurate, and your business plan must lay out a course for creating profit from your activity in the future. That written business plan can be a real asset if you end up in Tax Court versus the IRS.

Consulting a tax lawyer at the Law Offices Of Jeffrey B. Kahn, P.C. with offices in Los Angeles, San Francisco, San Diego and elsewhere in California early on in your business efforts will probably be the best investment you make in your business. A tax lawyer can review your actions and recommend steps to build your business in a sound manner. Furthermore, if you do end up facing the IRS at some point, your tax lawyer can defend you or negotiate for you, reducing your stress and exposure significantly. Remember, the IRS has their experts—you should too.

Description: The Law Offices Of Jeffrey B. Kahn, P.C. with offices in Los Angeles, San Francisco, San Diego and elsewhere in California has helped many people minimize or avoid adjustments from IRS by pursuing litigation and negotiations with the U.S. Tax Court. Working with a tax attorney is the best bet for minimizing adjustments that would create liability to the IRS.

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